Harry Nimmo: ‘tough’ patch hit holdings

The Standard Life UK Smaller Companies Trust’s shares are 11 per cent cheaper than the combined value of the assets it holds, something that is unusual given the vehicle’s stock has frequently traded at a premium.

Mr Nimmo, who has managed the trust since September 2003, said a tough second quarter last year had hit some of his holdings. He added that asset allocators had been spooked away from riskier investments, such as smaller companies, after a speech by Federal Reserve chairwoman Janet Yellen.

“My thinking was that the Ms Yellen speech was roughly mid-March [2014], which caused a kind of sea change with both multi-asset and global macro investors,” he said.

“The talk at the time was that rates would rise sooner rather than later and that caused multi-asset funds to take risk off the table.”

The manager acknowledged he had “no proof this was what happened”, but thought it made sense given something multi-asset investors might do is to “sell or short your mid and small caps” on the prospect of a rate rise.

Mr Nimmo also said some of the stocks in his portfolio “traded off very sharply”, in part due to the risk-off move.

He said stocks, such as clothing designer Ted Baker and temporary office space provider Workspace, were hit in the second quarter of last year.

But the manager said by the second half of the year those companies had provided strong trading updates to the market and their shares had subsequently bounced.

The trust suffered a 15 per cent loss in 2014, data from FE Analytics shows, but it has already returned more than 5 per cent so far this year – although this is behind his benchmark’s 11 per cent.

However, Mr Nimmo’s long-term track record is strong, with the trust’s 10-year total return of 436.8 per cent well above the benchmark Numis Smaller Companies ex IT index rise of 222.4 per cent, the data also shows.

Elsewhere, Mr Nimmo said some stocks that he had owned in 2014, which were on a high price-to-earnings (p/e) ratio and that he deemed “high-wire stocks”, were also briefly hit hard last year.

Online clothing retailer Asos was a top-10 holding for the manager in early 2014 at 5 per cent. Even though his average sale price of £47 was a lot more than his 2006 entry price of 80p, the retailer had traded as high as £70 prior to the manager selling.

He also said grocery delivery company Ocado, another stock that traded on a high p/e, was also hit in the first quarter of last year, with its shares falling from £6 on February 21 to roughly £3 on May 16, according to data from Bloomberg. Mr Nimmo sold out of the company last year.

The manager said since “normality resumed” in the second half of 2014, the trust had “made up most of what it had lost in the second quarter”.

“I’m absolutely relaxed about our investment process, which has been stable since we launched the open-ended fund [in 1997],” he said.

Mr Nimmo said his style was “more risk averse”, and that he looked primarily at cashflow and balance sheet strength when assessing businesses.

He added his “best periods are bear markets”, meaning the “very bullish market” for the past five to six years had been “unhelpful”.

Trust’s wide discount may warrant closer attention by investors

The fact that the shares of Harry Nimmo’s trust trade at such a discount is worth investors thinking about.

Trading on a discount of 11 per cent means the manager’s Standard Life UK Smaller Companies Trust is approaching the average discount of peers in its sector, something which is rare considering it has long traded on a premium.

Investec investment trust analyst Paul Locke said the vehicle had not been at this level of discount since 2009-10 and therefore might warrant closer attention from investors, especially since it “provides a near identical portfolio and performance profile to the £1.1bn open-ended fund” run by Mr Nimmo.

“Commonality across the portfolios is strong, with the funds sharing eight of the same top-10 holdings at end-March [albeit with slightly different weights] with a resultant strong correlation between the two funds at the net asset value [Nav] level,” Mr Locke said.

“Nav performance on [the trust] has remained somewhat mediocre, particularly when set against Mr Nimmo’s historic capacity to add significant value.

“Yet for holders of the open-ended fund and long-term advocates of the manager and his style, a discount approaching its widest level for five years may, and perhaps should, prove appealing.”